Cardenas Says Colombia Weighs Change to Tax on Bond Profits

  • Government may add changes to tax debate in Congress
  • Finance Minister sees rate cut discussion when inflation cools

Colombia’s government may add changes to a tax on foreigners’ bond profits to legislation being debated by lawmakers, Finance Minister Mauricio Cardenas said.

The tax reform bill submitted to Congress last month did not include any alteration to the tax on foreigners’ earnings on local peso bonds, known as TES, surprising some analysts who had expected a cut.

“We’re hoping to engage in discussions on that topic throughout the Congressional deliberations," Cardenas told reporters in London on Wednesday. “We did not submit any proposals on that front, but it doesn’t mean we’re closed to discussion regarding taxation of portfolio flows.”

Colombia’s Director of Public Credit Milena Lopez said in May that the government was discussing whether to reduce the tax to 6 percent, 5 percent or eliminate it entirely, from its current level of 14 percent. A previous cut to the tax in 2013 helped draw foreigners into the local market and reduce borrowing costs.

Foreigners increased their holdings of local peso bonds to 23 percent of the total in September, from less than 4 percent in 2012.

Investor Draw

“A lot of investors will switch from bonds with international settlement to local bonds whenever the tax at source issue is resolved,” said Lutz Roehmeyer, who helps oversee about $12 billion in assets at Landesbank Berlin Investment and favors Colombian peso bonds issued offshore. “It is a simple calculation of after-tax yield. The lower the withholding tax, the better the yield, the higher the interest from abroad.”

Local bonds maturing in July 2024 extended declines for a fifth day, pushing the yield up three basis points on Wednesday to 7.12 percent. The premium investors demand to own emerging-market sovereign bonds over Treasuries widened two basis points to 347, according to JPMorgan Chase & Co. indexes.

Cardenas, who chairs Colombia’s central bank board meetings, said the nation may start to debate an interest rate cut as consumer price rises slow. Annual inflation will slow to about 6.1 percent by the end of the year, he said.

“I expect as the inflation rate begins to fall, we will open the conversation about the possibility of cutting interest rates to help facilitate economic growth,” he said. “I am very optimistic that based on some preliminary information about food prices, that inflation is going to be below seven percent for the month of October.”

— With assistance by Andrea Jaramillo

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